New year, new curbs on payday lenders

Tuesday

Jan 5, 2010 at 12:01 AMSep 9, 2014 at 5:26 PM

State regulators have placed new restrictions on payday lenders in an effort to close loopholes that had allowed the short-term loan companies to sidestep limits added just a year ago.The State Corporation Commission last week entered an order that bars

State regulators have placed new restrictions on payday lenders in an effort to close loopholes that had allowed the short-term loan companies to sidestep limits added just a year ago.

The State Corporation Commission last week entered an order that bars the companies from offering "open-end credit" or tying paycheck advance loans to motor vehicle titles - practices some payday lenders had adopted after the restrictions passed by the General Assembly went into effect last January.

Those restrictions limited borrowers to one payday loan at a time, capped interest at a maximum annual rate of 36 percent, capped loan fees at 20 percent of the amount borrowed, set the maximum loan amount at $500, and set the payback period at twice the borrower's pay period; for example, if the borrower is paid once a week, he or she has two weeks to pay back the loan.

Those rules were enacted to curb what critics charged were predatory abuses by the payday loan industry. For example, the Center for Responsible Lending, a North Carolina-based watchdog group, claims that typical payday loans "carry annual interest rates of 400 percent, and the industry relies for 90 percent of their revenue on borrowers who repeatedly renew or reopen their payday loans. The typical borrower ends up paying about $500 in interest for a $300 loan, and still owes the principal."

The Community Financial Services Association, a payday lending industry group, has denied that lenders charge "exorbitant interest rates," "trap borrowers in a never-ending cycle of debt" or otherwise engage in abusive practices. The association argues that its members provide a much-needed source of credit for consumers who don't have access to more traditional sources such as bank loans.

But the industry's arguments have failed to impress policymakers. Numerous states have passed restrictions on these short-term loans over the past decade, in some cases virtually prohibiting the business entirely. And because of the industry's tendency to cluster offices near military bases, the Department of Defense in 2007 passed its own regulations limiting fees and interest on payday loans, vehicle title loans and tax refund anticipation loans.

The SCC currently lists 19 payday lender offices in the Tri-Cities, including three locations of the industry leader, Advance America Cash Advance Centers of Spartanburg, S.C. Nine of the offices are in Petersburg, six in Colonial Heights and four in Hopewell.

When the industry adjusted its strategies after Virginia's new restrictions went into effect last year, some state lawmakers were angered by what they saw as an end-run around their intentions.

For example, some lenders began offering "open-end credit," similar to the revolving line of credit behind a credit card. The borrower need not pay off the full balance but must pay interest on any outstanding amount. This tactic enabled lenders to offer loans well above the legislature's $500 limit.

Other lenders who offered both payday loans and car title loans began requiring payday borrowers to provide copies of their vehicle titles as security on their loans, another way of getting around the $500 limit.

The new restrictions bar any lender from writing a payday loan to a consumer who also has a vehicle title loan. If the payday lender also offers open-end credit, the new rules require that such credits be backed by vehicle titles.

The changes also prohibit payday lenders from operating certain other kinds of businesses out of their offices, prevent them from writing loans for consumers to pay for services provided by their other business lines, and bar them from selling any kind of insurance.

Potential penalties for violations include fines and license suspension or revocation.

- Michael Buettner may be reached at 722-5155 or mbuettner@progress-index.com.

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